Japan Tugs on All Levers but Still Needs Reform : Economy: Optimism over current correctives must not sideline fundamental change.
Designed to break the crash of the real-estate and equity markets, and to shore up the quickly sagging economy, the program announced by Japanese authorities over the past two weeks has won wide approval. The market has popped higher; the country’s principal economic organizations have praised the program and the international community has heaved a huge sigh of relief that the policy process has finally moved into high gear. These measures will later be seen as the critical turning point in a policy-induced recession that led to the Great Crash of Japanese equities and real-estate.
It has been increasingly argued that Japan’s policy Establishment had lost its touch, that its grip on the economy had weakened as a result of deregulation and the internationalization of markets. The policy swoop of the last fortnight reveals a very different reality. Having domesticated the brokers, tamed the banks and sent the speculators on the run, policy authorities today have more control over the economy than in the past decade. But that is by no means an unmixed blessing.
With the new package, authorities have pulled the policy levers about as far as bureaucratic prerogative allows. Even with the successful implementation of the support package, Japan can only be put back on track to sustainable, healthy, consumer-driven expansion through fundamental reform, deregulation and the de-bureaucratization of the economy. These are the urgent issues that Japan must address, and to which the markets and the international community will return once the current euphoria wears thin.
In the short term, it is important to assess just how successful the rescue package will be. The authorities are working on four fronts: continuing monetary ease, off-loading a large portion of non-performing bank debt to the taxpayer, aggressive administrative guidance and strong fiscal support for the economy.
Low-interest rates-- Japan will not only have the lowest debt financing costs in the world, but on an after-tax basis, funds will be almost free. To say the least, that will provide very constructive support for the economy and asset markets.
The socialization of a large portion of non-performing bank debt -- Japan has in effect decided to socialize a significant portion of its bad commercial real-estate debt. For the banks, it is Christmas in August. Although shrouded in the drama of resignation and scandal, the government moved last summer in a similar manner to bail out the securities houses when it decided that it would be illegal for them to honor commitments to investors that they had made during the run-up of the equity market. In both cases, it is the taxpayer who will end up holding the bag.
Administrative guidance and regulatory change -- The earnings are simply not there to sustain the current market rebound. With the corporate sector on course to a fourth year of declining earnings, and only a modest pick-up next year, it will not be until 1994 that the aggressive cost-cutting measures now being instituted begin to affect the bottom line. Here again, policy is working to the limit of capacity. To put the equity market back on a strong footing for the long term, the best approach would be to increase market liquidity. That can be done only through less regulation and more, much more market transparency.
Strong fiscal package-- The final element of the support program is the $85-billion mega-spending package announced last week to spur the economy and restore confidence in the system. At 2.4% of gross national product, the budget is the largest ever proposed. As such it is a measure of the magnitude of the problems facing Japan, which were so glibly denied. Two-thirds of the spending is in direct support of real estate and the stock market. If the budget is enacted quickly, its effect would be a potent one, but it is not all new money.
As a result, the spending package announced with such fanfare will have virtually no effect on the economy through December. When the current euphoria dissipates, more sober assessments will follow, putting the market and international economic relations once again at risk.
Politics: the critical uncertainty-- At the very moment that the policy process has moved into high gear, the latest in a series of scandals has moved to the very center of Japanese politics, when the man considered by many to be the nation’s most powerful politician admitted accepting $4 million in a kickback scheme. The country faces the very real prospect of political paralysis. Very quickly this new situation risks undermining the credibility that authorities have wrenched from investors in recent days. That in turn could quickly lead to the type of market turbulence that would critically undermine the fiscal and monetary program now being moved into place.
But even if successfully implemented, the current program has stretched to the limits what can be accomplished through fiscal and monetary policy. From here on, what Japan requires is fundamental tax reform, land reform, deregulation and more deregulation. It is now urgent for Japan to address what is both critical for itself and the world economy.
